Checkers/Rally’s sales and profits have plunged this year

Sales and profits have fallen steeply this year at drive-in burger chains Checkers and Rally’s, just one year after their $525 million, management-backed buyout.

According to Debtwire, same-store sales fell more than 5% in the third quarter, leading to a 22% decline in EBTIDA, or earnings before interest, taxes, depreciation and amortization. Revenues at the chain declined 10.4% in the period.

Debtwire cited “two sources familiar with the situation.”

System sales at the larger Checkers have fallen 6.5% year to date through October, according to data from Technomic Transaction Insights, including 11.4% in the most recent three months.

Sales have declined 8.1% at Rally’s, including a 15.3% decline in the most recent three-month period.

Technomic is a sister company of Restaurant Business.

Debtwire covers the lending markets and monitors companies that struggle and could breach their lending agreements.

Reshmi Basu, who authored the story for Debtwire, said in an interview that the company could have to rework some of its lending agreements “if the numbers continue to go at this trajectory.”

She said the company has “less breathing room” with some of the requirements in its lending agreement as a result of the earnings decline this year.

A representative for Checkers did not respond to a request for comment Tuesday.

Checkers and Rally’s have been selling company stores to franchisees recently—a third of their 860 locations are company-operated. Franchise revenue rose 9.5% while company restaurant sales declined by 13.3%.

The refranchising likely explains much of the revenue decline.

But the decline in profitability highlights the growing challenges in the restaurant space, even for companies that took on debt only recently.

Checkers and Rally’s operate in the burger space, arguably the most competitive sector in the restaurant business. Only half of the 10 largest burger chains have seen sales increases this year, according to Technomic.

At the same time, labor costs have skyrocketed in many markets, putting pressure on operator profits.

That space has been dominated by heavy discounting all year long, something the chains’ rivals have frequently lamented.

“Across the entire industry there seems to be almost a desperation of same-store sales and transactions,” Jack in the Box CEO Lenny Comma said last week. “A lot of things happening in the market are hypercompetitive and even a little irrational.”